Summary

Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer.

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Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017. The forecast, revised down by 0.1 percentage point for 2016 and 2017 relative to April, reflects a more subdued outlook for advanced economies following the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates, as monetary policy is now expected to remain accommodative for longer. Although the market reaction to the Brexit shock was reassuringly orderly, the ultimate impact remains very unclear, as the fate of institutional and trade arrangements between the United Kingdom and the European Union is uncertain. Financial market sentiment toward emerging market economies has improved with expectations of lower interest rates in advanced economies, reduced concern about China’s near-term prospects following policy support to growth, and some firming of commodity prices. But prospects differ sharply across countries and regions, with emerging Asia in general and India in particular showing robust growth and sub-Saharan Africa experiencing a sharp lowdown. In advanced economies, a subdued outlook subject to sizable uncertainty and downside risks may fuel further political discontent, with antiintegration policy platforms gaining more traction. Several emerging market and developing economies still face daunting policy challenges in adjusting to weaker commodity prices. These worrisome prospects make the need for a broad-based policy response to raise growth and manage vulnerabilities more urgent than ever.

The forces shaping the global outlook—both those operating over the short and long term—point to subdued growth for 2016 and a gradual recovery thereafter but also to downside risks. These forces include new shocks, such as Brexit; ongoing realignments in China and among commodity exporters; slow-moving trends in demographics and productivity growth, as well as noneconomic factors, such as geopolitical uncertainties.

Gains from Eliminating Tariffs and Implementing the World Trade Organization Trade Facilitation Agreement

Trade growth has slowed since 2012 relative both to its strong historical performance and to overall economic growth. This chapter finds that the overall weakness in economic activity, in particular in investment, has been the primary restraint on trade growth, accounting for up to three-fourths of the slowdown. However, other factors are also weighing on trade. The waning pace of trade liberalization and the recent uptick in protection-ism are holding back trade growth, even though their quantitative impact thus far has been limited. The decline in the growth of global value chains has also played an important part in the observed slowdown. The findings suggest that addressing the general weak-ness in economic activity, especially in investment, will stimulate trade, which in turn could help strengthen productivity and growth. In addition, given the subdued global growth outlook, further trade reforms that lower barriers, coupled with measures to mitigate the cost to those who shoulder the burden of adjustment, would boost the international exchange of goods and services and revive the virtuous cycle of trade and growth.

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The Implications of Trade for Productivity and Welfare: A Primer

The Slowdown in Trade Growth: Key Patterns

Understanding the Slowdown in Trade Growth

Summary and Policy Implications

Box 2.1. Is the Trade Slowdown Contributing to the Global Productivity Slowdown? New Evidence

Inflation has declined markedly in many economies over the past few years. This chapter finds that disinflation is broad based across countries, measures, and sectors—albeit larger for tradable goods than for services. The main drivers of recent disinflation are persistent economic slack and softening commodity prices. Most of the available measures of medium-term inflation expectations have not declined substantially so far. However, the sensitivity of expectations to inflation surprises—an indicator of the degree of anchoring of inflation expectations—has increased in countries where policy rates have approached their effective lower bounds. While the magnitude of this change in sensitivity is modest, it does suggest that the perceived ability of monetary policy to combat persistent disinflation may be diminishing in these economies.

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A Primer on the Costs of Disinflation, Persistently Low Inflation, and Deflation Inflation Dynamics: Patterns and Recent Drivers

Spillovers are a key factor shaping the global outlook and the risks around it, and the growing clout of emerging markets means that they are playing an increasing role, including from noneconomic shocks. This chapter analyzes spillovers of: (i) China’s rebalancing towards more sustainable growth, and (ii) increasing migration flows. China’s transition has a direct negative impact on global demand through trade, an indirect impact through commodity prices, and an effect on asset prices. However, a well-managed transition will benefit the global economy in the long term, with more sustainable growth in China and a reduction of risks of a disruptive adjustment. China can help by accepting the slowdown and by clearly communicating its policy intentions. Countries experiencing negative spillovers can use policy buffers in the short term, but plan for adjustment and explore new opportunities to bolster trade. As for migration, it can provoke political backlash in recipient economies, but offers gains in terms of higher growth and relief from population aging. Labor market integration is key to harnessing the gains in terms of growth and migrants’ contributions to the fiscal accounts. Source countries may face negative growth effects, which can be mitigated by remittances, the benefits of diaspora networks, and policies addressing the effects of emigration of young and skilled population.